If there is one altar at which Silicon Valley worships, it is the shrine of the holy network effect. Its mystical powers pluck lone startups from obscurity and elevate them to fame and fortune. The list of anointed ones includes nearly every technology success story of the past 15 years. Apple, Facebook, Microsoft, eBay, and PayPal, have each soared to multi-billion-dollar valuations on the supreme power of the network effect.

But today, the power of the network effect is fading, at least in its current incarnation. Traditionally defined as a system where each new user on the network increases the value of the service for all others, a network effect often creates a winner-takes-all dynamic, ordaining one dominant company above the rest. Moreover, these companies often wield monopoly-like powers over their industries.

IN THE BEGINNING

Once, all a company needed to do to leverage the network effect was facilitate communication between a critical number of customers. If enough people used a particular system to exchange information, a leader would emerge and become the de facto platform. Companies who could either form a marketplace or facilitate the flow of information between parties became tremendously powerful as central hubs of data transfer.

In fact, the first network effects platform was Bell Telephone, which established a government-sanctioned monopoly nearly 100 years ago. Since then, successful network effects businesses have sung from essentially the same hymnal.

First, establish a medium of communication by building the required infrastructure or inventing a new technology. For example, lay down telephone wires from coast to coast. Then, provide access to the network to improve the ease of information transfer — say, by selling fax machines. Finally, race to grow the user base before competing services do. If you get bigger faster than your competitors, voilà! You’re inside the pearly gates.

RAPTURE

That’s the plan at least. But today, things are not quite so simple. For one, in the old days, consumers paid to access the network through their upfront investment in hardware. These upfront costs locked users into the network and once they were in, they were in for good, thus erecting barriers to entry for would-be competitors.

However, the cost of providing access to the network has fallen precipitously. The days of customers buying expensive hardware to use a network are gone as is the correlating lock-in effect.

CONVERTS

In addition to access costs falling to zero, another key component of what once kept users locked into a network has vanished. Once, porting contacts onto a new network, like switching instant messaging services from Yahoo! to AIM, was a non-trivial task.

Today however, customers use their Facebook, Twitter or Google profiles to join a new service in seconds. A burgeoning network, take Instagram or Pinterest, can leverage the single sign-on enabled by the social graph to reach critical mass faster than ever before. Users not only port their personal information but bring their connections as well. In the age of the social web, the convenience of the social graph has largely toppled the lock-in that once kept users bound to one network over another.

TENDING THE FLOCK

Without the upfront investment in physical hardware and users’ newfound ability to port personal information and contacts, how is a company to retain its users? Is the network effect’s ability to lock-in users dead? Hardly.

The power to leverage the network effect now resides in “stored value.” Unlike network access costs, stored value is investment that comes in small increments with repeated use, increasing the importance of the service the more a user engages with it.

STORED VALUE

Stored value comes in four forms, and companies leverage these tiny investments to build lock-in to their service and retain users.

Creative content (e.g. Pinterest, Facebook, Instagram): Users invest in creating a portfolio of creative content, which forms the basis of their interactions on the platform. The quality and quantity of the content results in more interactions with other users, which, in turn, provides greater value to the content creator.

Reputation (e.g. TaskRabbit, AirBnB, StackOverflow): Although marketplaces for physical goods, such as eBay, have been around for some time, services marketplaces have grown in popularity lately. Trust is an important component of this new breed of network effects business. As a result, reputation built on the platform directly contributes to greater value for all users. Building reputation on a platform requires consistent delivery of highly rated services and may also involve qualifying for some minimum criteria set forth by the platform. Hence, once a service provider builds reputation on a platform, it prevents her from migrating to a competing platform.

Usage Data: Users store value in the form of data, either by actively collecting information, such as in the case of Dropbox or Reddit, or passively as their usage improves the service by offering more relevant information, such as is the case with Quora, which delivers a personalized news feed based on usage. The more a user consumes information through the platform, the more intelligent the algorithm becomes in recommending pertinent content to the user. In both cases, the data set built by or for the user delivers greater value with increased usage, something that won’t directly be available on a competing platform.

Influence (e.g. Twitter, YouTube channel subscriptions): Networks that utilize a one-sided follow model create an influence dynamic. Unlike importing contacts or “friending” people, collecting followers is largely outside the direct control of the user. With the exception of sketchy tactics banned by the Twitter terms of service, accruing more Twitter followers can only be done by tweeting content others find interesting enough to share. As the user’s follower count grows, so does the stored value in the network and the incentive to stay actively engaged.

KEYS TO THE KINGDOM

Creating a network effect is not what it used to be. Today, stored value created by the users reinforces the power of the network effect to retain users and grow market share. This dynamic makes creating user habits all the more important as investments of stored value only occur through successive passes through the user experience (see Nir’s previous article and video).

With the portability of the social graph and the fall of upfront costs to join a network, companies must leverage new ways of acquiring and retaining users. Business models that leverage a network effect plus stored value, hold the keys to the kingdom.

TechCrunch is reporting insider information that the big and much-anticipated Microsoft announcement tomorrow is an e-reader and streaming media tablet produced in conjunction with Barnes & Noble. If that’s true — and that’s a big if — I’m more than a little shocked by the massive build-up and pre-launch tension-building secrecy.

One loser

Let’s be honest: Windows on a tablet is, at the moment, a loser. Currently, Windows is a tiny, insignificant slice of the tablet market. There’s hope in Redmond, and maybe even belief, that this will change soon, but no-one else is holding their breath.

A second loser

A second moment of honesty: Barnes & Noble is a loser. We all know its chief competitor — the one named after warrior women tough enough to saw off a boob so they could kill their enemies with greater efficiency. And yeah, Amazon is exactly that tough.

Amazon is worth almost a hundred billion dollars; Barnes & Noble under a billion. Amazon had over $50 billion in revenue in the last 12 months; Barnes & Noble just over seven. Amazon’s revenue per employee is triple Barnes & Noble’s … the list goes on. Wolfram Alpha tells the story:

One plus one (plus one)

I believe it was the indubitable Mr. Holmes who said that one plus one has never failed to equal two. Pairing an unpopular and as-yet-unproven operating system with a failing and marginal content partner is not exactly a recipe for success.

Microsoft has been adding content partners to Xbox streaming with increasing velocity, announcing 35 new ones in just the past month at E3, including Nickelodeon, NBA Game Time, NHL GameCenter, WatchESPN, and The Weather Channel. These additions, with all the other content partners announced previously, have led to plenty of speculation that Xbox couldreplaceyourcable or satellite TV provider.

Now you have something interesting.

If Microsoft’s play is indeed to create a new kind of tablet that can replace — perhaps better than iPad — your TV provider, watch out.

Microsoft is expected to unveil a tablet running a new version of Windows. Photograph: Rick Wilking/Reuters

Microsoft appears to be preparing to launch an own-brand tablet running a new version of Windows in an effort to compete with Apple‘s iPad.

An invitation to an event in Los Angeles on Monday evening sent out by the software company late on Thursday – but lacking venue details – has sparked expectation that Steve Ballmer’s company is now ready to take on Apple’s dominance in the tablet market.

This would be a dramatic break from Microsoft’s usual moves in computer hardware, where it develops the software and licenses that to hardware makers to ensure the broadest possible market. But Microsoft has fallen behind Apple and Google in the fast growing tablet market – already one-eighth as large as the PC market and forecast to be 40% by 2016. The fastest growth in tablet sales is in western countries, where PC sales are slowing, reducing sales in the Windows division in four of the past six quarters. Windows 8, to be released this year, is designed to be used on a tablet as well as a desktop PC.

“If Microsoft wants to control the entire user experience and the entire quality of their products, they have to build their own hardware,” Michael Cherry, an analyst at Directions on Microsoft, a Redmond-based market research firm, told the Bloomberg news service.

The location of Monday’s event, near Hollywood, could indicate that Microsoft may announce a content deal using its new SmartGlass app, which bridges the gap between the TV and the smartphone or tablet. Other speculation is that the tablet will have access to an ebook store using Barnes & Noble’s technology, following a $300m deal made at the end of April.

Image via CrunchBase

The timing of the launch would also spike Google’s guns. The search giant is expected to unveil an own-brand tablet at its Input/Output event on 27 June although Microsoft’s forays into own-branded products have had mixed success. Microsoft has declined to comment. Its invitation says: “This will be a major Microsoft announcement – you will not want to miss it.”

ABOUT THE AUTHOR

Matthew Panzarino is the News and Apple Editor of TNW. Matthew brings 20 years of computing experience and mobile tech obsession to delivering the latest and greatest tech news and views. You can follow him on Twitter or email him at matthew@thenextweb.com

You would have to be blind not to see at this point that the future of our computing lives will be mobile. Recent statistics gathered by research group Forrester only back that up. According to the report, there will be 1 billion smartphone customers by 2016, with 257 million smartphones and 126 million tablets in the US alone.

Of those worldwide billion mobile devices, Apple, Google and Microsoft will control some 90% of the market with their respective platforms. Business users will factor heavily into these numbers, with some 350M employees using smartphones.

The majority of these will not be company phones either, as the majority will follow the ‘consumerization of IT’ trend, with some 200M bringing their own smartphones to work. Tablets don’t escape the trend either, with some 70% of these used for work being purchased by the employees themselves.

This trend to mobile will result in a mobile spending market of $1.3 trillion and an app market worth $55B, forecasts the group.

In order to compile the numbers, 61 different companies large and small, including AT&T, Citrix, Microsoft, RIM, Salesforce, Skype, Sugarsync, Dropbox, Apperian and more were interviewed.

The document is largely aimed at the Chief Information Officers of companies, encouraging them to establish positions explicitly for mobile, which will blossom so much over the next few years that it may even eclipse traditional IT and requires its own set of rules enterprise systems. Mobile can’t be treated the same way as a stationary terminal or even laptop computer can and companies have to be ready for the influx.

There is also the matter of a company being prepared for an explosion of interactions and transactions that comes from lowering the barrier that customers have to interact with their products. Simply put, if you have constant access to a product, you will use it more. And people are never without their smartphones.

Examples of several companies, including Pandora, USAA and Salesforce show that mobile engagement is through the roof over traditional channels. Pandora alone gets some 60% of its listening minutes streamed to mobile devices, not desktops or laptops.

There is a lot more information geared to helping companies redefine internal roles to help them focus on this huge mobile platform growth, but it all boils down to the same thing. There is a tidal wave of mobile devices coming in the next 5 years, and they are bringing along with them an exponential growth in engagement and product use because they are so easy to use.

The personal nature of a smartphone or tablet lends itself to ease of use and hundreds, if not thousands, more interactions per user in any given month. The mobile age is booming, and it’s sucking in a disproportionate amount of traffic and money, get ready.

If we accept that the modern mobile computing movement kicked off in 2007 with the launch of the iPhone, than 2011 was easily the most pivotal year we’ve yet seen. Here are five numbers that illustrate just how eventful a year it was.

324 million: The number of smartphones sold worldwide through three quarters of 2011 (according to Gartner), and feel free to tack on another 120 million or so to account for the fourth quarter. That’s a 63 percent increase compared to the same period in 2010. And amazingly, that’s still only about a quarter of mobile phone sales in general, which underscores just how much growth remains in this industry as component costs decline and wireless networks improve.

194 percent: The growth in Android smartphones worldwide from the third quarter of 2010 to the same period this year. Android’s growth has been nothing short of phenomenal, and while the aging Symbian remains the world’s most widely used mobile operating system Android has lived up to everything Google (NSDQ: GOOG) ever hoped it would in helping to ensure that one company—Apple—would not dominate the modern mobile market.

33.62 billion: The market value shed by Research in Motion (NSDQ: RIMM) during 2011, the year in which it became clear that the company has no clue how to move beyond the BlackBerry that sustained its business for so long until the iPhone made it look pedestrian. At year’s end, RIM had once again delayed a next-generation product while begging for more time, and time is most assuredly not on its side.

6: The number of companies that joined together in order to deny Google a chance to purchase Nortel’s horde of mobile patents in July, forcing it to spend $12.5 billion in August on a panic purchase of Motorola (NYSE: MMI) in order to obtain some sort of patent cover for Android. Patents were the ubiquitous story of 2011 in the mobile world, playing a huge role in product rollout strategies, industry alliances, and frustrating nearly everyone except Apple (NSDQ: AAPL) and Microsoft (NSDQ: MSFT) in the process.

3: The number of mobile products introduced by Apple under the late Steve Jobs, who finally succumbed to cancer in October. The iPod, iPhone, and iPad created the modern mobile market by showing the world that people were desperate for easy-to-use mobile user-interfaces that were also capable of running sophisticated applications and browsing the Web as if they were PCs. And they also set off a scramble among traditional mobile companies like Palm (NYSE: HPQ), RIM and Samsung as well as traditional PC companies like HP, Dell, and Acer to try and catch up to Apple’s lead. Android may have the numbers, but Apple’s vision of mobile computing remains more influential.

Have you ever felt it’s harder to find something to watch on television now than it was when there were fewer choices? This can partly be attributed to the dilution of content quality, but a greater problem is that operating a television and discovering content is much more complicated than it used to be.

Television, Evolved

For fifty years, watching television was as simple as turning on the set and flipping through limited, regularly scheduled programs. Technological improvements have made this experience easier by eliminating the need to adjust your antenna, introducing remote controls, and adding geographically and topically diverse channels, among other advances.

The introduction of the VCR likely represented the first technological advance for television that also introduced significant user confusion. The advantages of recording a show and watching it at your own convenience are obvious, but the “TV/VCR” button that switched back and forth between scheduled and recorded programming baffled some users to the point of abandoning VCR technology altogether.

More recently, TiVo and other digital video recorders (DVRs) attempted to integrate the television viewing and recording experience more tightly. They introduced many now-common features such as instant replay, pausing of live TV, and time shifting. If you own a DVR, you no longer need to know or care when your favorite shows are on; your DVR will record them for you automatically, and you can watch them at your convenience. In some cases, your DVR can even record shows for you that it algorithmically guesses you might also like, based on your viewing habits. And—perhaps most importantly—you can operate it all from one remote control.

But what if you add a DVD player, a surround-sound audio receiver, and a game console? How many remotes are on your coffee table now? Now add Netflix, Hulu, iTunes, Vudu, YouTube, podcasts, and cable providers’ on-demand services.

Consumers have many more video options available to them now. Consumer electronics manufacturers are scrambling to bundle as many services as possible into their television and set-top boxes, and the services themselves are all fighting for mindshare, competing to paint their logos on your screen, in menus, and even on your remote. Televisions are no longer just portals to free, ad-supported programming; they’re now digital media services shopping centers.

New Patterns

Just as VCRs introduced new usage patterns and experiences for television viewers, so do all of these new devices and services. But they add more than just a few new features that require an extra button or two; these new types of content depend on new methods of discovery and consumption. The traditional, temporal program guide still makes sense for scheduled content, but on-demand content doesn’t fit into that model. How do you integrate paid or on-demand video, amateur and independent content, and scheduled programming into one seamless experience? Is it even possible?

This problem is easier to solve on a computer, and many consumers are watching video content on laptops or mobile devices. But television as a device is still alive and well in most consumers’ homes; it’s just getting more capable, and more complicated.

As electronics manufacturers struggle with content integration challenges, one thing seems certain: it’s going to get worse before it gets better. Service providers and manufacturers alike are trying to devise their own proprietary, branded solutions. This means a different user experience for every service on practically every device. And with everyone rushing new products out to customers, the living room is becoming cluttered with keyboards, controllers, and touch pads.

Some Good First Steps

With all of these products on the market, no one has yet designed a good, simplified television experience that seamlessly integrates all available content sources. But there are some interesting products that can change the home viewing experience for the better. The ideal solution will likely require a combination of hardware and software innovations. These are some examples of the better ones.

Aggregated Search

Most of today’s consumer video products “integrate” content services by introducing independently designed and developed widgets or apps. Apps are the big new thing; everybody likes apps, right? Content and service providers typically like apps because they can control the experience and throw their brand all over the screen. And users often like apps because they offer modular access to the content that interests them. But apps also create a fragmented viewing experience by locking media into content silos. Each app is designed to look and behave differently. And how do users know which app contains which content?

One popular DVR, TiVo, attempts to address this problem with its aggregated search feature. Start typing the name of a program or performer, and TiVo Search finds content across a handful of sources, including multiple online sources and traditional scheduled programming. If the content you’re seeking is on now, you can watch it immediately or record it. If the content is available through a streaming partner, you can purchase it, rent it, or watch it for free, depending on the service. The idea is that one search finds all content, regardless of its source. TiVo’s service is far from perfect, as it doesn’t yet include all of TiVo’s partner service providers, but it’s a good step in the right direction.

The Hybrid Remote/Keyboard

Search requires some form of text entry, so the simple direction controls on most remotes don’t cut it anymore for robust content discovery and selection. Some device manufacturers support multi-tap or T9 text entry on a remote control’s number keys. This is a clever workaround, but it’s cumbersome and time-consuming to use. TiVo may have designed the best overall solution, recently integrating a slide-out keyboard into its award-winning peanut-shaped remote control. Other manufacturers are also experimenting with integrating a keyboard into the remote. This gives users the flexibility of a keyboard when it’s needed but keeps it hidden when it’s not. Who wants a keyboard sitting out on the coffee table all the time? It’s likely that consumers will see more remote controls with integrated keyboard components as content search and discovery becomes an increasingly important part of the television viewing experience.

Tablet as a TV Accessory

If content discovery is difficult with a television remote, why not take it off the TV and move it to something that more and more people have with them while watching TV—a tablet device? Comcast, TiVo, and other set-top-box providers have released tablet apps that let users explore content in ways never possible on the larger screen. Quickly scanning through categories, searching for keywords, and filtering by interests with swipes and taps gives television users unprecedented access to previously undiscovered content, all without disturbing the on-screen viewing experience.

While most of these solutions operate just one device (a set-top box), one product, Peel, tries to solve that problem by rethinking the approach to answering the question, “What’s on now?” It lets users control multiple devices from one interface. Peel acts as a universal remote that controls your entertainment center devices based on interactions with your touch device. Unfortunately, Peel doesn’t integrate content from popular online content providers, and it doesn’t yet integrate your own recorded shows or other DVR functions. But with a mission derived from the question, “Why is TV so hard?” they seem to be on the right track.

These interactive accessory solutions introduce a new approach to content discovery by abstracting traditional program listings into a rich, visual experience. You’re browsing colorful show tiles and movie posters in your hand rather than wading through screen after screen of channel numbers and text, and you’re doing it without interrupting what you or the family are already watching.

Is This As Good As It Gets?

Two of television’s biggest, new usability problems are that finding and accessing content is difficult, and traditional remote controls are no longer sufficient for the job. Today’s best products acknowledge and address both of these factors by offering new ways of discovering content and by introducing new human interface devices for the television. But these particular examples seem more like patches than solutions, and it’s unclear whether we can expect anything better in the near term.

Aggregated search and discovery is likely the best way to remedy today’s fragmented video services ecosystem. Making this happen, however, is a technology challenge, a UX challenge, and a business challenge. With ever-growing libraries of content covering a highly diversified taxonomy of interests, there’s a lot of video content to index and a lot to sift through. The biggest issue, however, may be that the fragmentation will grow as content providers continue to rely on product distinction, brand recognition, and exclusive content deals as part of their business models. While this may be good for business in the near term, it makes content aggregation and integration more difficult.

And what’s next? Today’s solutions will ultimately be replaced by newer, better ones, and the best products will be those that match consumers’ lifestyles. Ultimately, great consumer experiences will prevail in the marketplace. That doesn’t leave a whole lot of room for a keyboard on the coffee table.

As technology advances, so do the possibilities. Gesture control à la Minority Report? Microsoft is experimenting with this on Xbox, but it has a long way to go to feel natural. Or maybe voice control: “TV, play the extended pilot episode of Arrested Development.” Some companies are making great strides to define a simple, seamless experience for users, but we still have a long way to go. Our challenge—our opportunity—as UX professionals is to steer electronics device product managers in the right direction, to challenge the industry’s dependence on discovery models that just don’t work anymore, and to encourage often competing services to support seamless customer experiences. It’s time to rethink the television experience. It’s time to make it easier.

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My name is Hugues Rey. I Spent 20 years of my professionnal life in communication agencies development through digital & data infusion. Born in July 1968 in Ixelles (Belgium), I began my career in ‘92 as Research Manager for Media+Square (now WPP Mindshare) and than as Research Director for Initiative Media in ‘98. In 2000, I created Fastbridge - the digital agency of Initiative Media. From 2006, I was the Digital Director Europe Middle East Africa for Initiative. I begon at Havas Media Group Belux in Sept 2010 where I'm now CEO. I'm also active in many professional media associations (UMA, CIM (Former president of TV Commission TV & Internet-commission) and GRP). Finally, I’m responsible for several readings at Solvay Brussels School and other associations. Please enjoy your reading !

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